Americans living overseas cannot afford to lose sight when tracking changes or updates to proposed tax changes for the 2021 year (due 2022). Even if you do not owe any money to the IRS, remember that you will likely still be required to file. The U.S. taxes every one of its citizens, no matter where in the world they choose to live. The various tax changes and updates for expats can leave you at best, confused — and at worst, unaware.
Under Biden’s Build Back Better (BBB) framework, the top marginal capital gains tax rate could be raised to 31.8 percent by the application of a new surcharge of eight percentage points to modified adjusted gross income (MAGI) above $25 million, including on capital gains income, and this is the highest hike for fifty years, as reported by Forbes.
The upcoming festive season is a good opportunity to set aside some quiet time and think about getting your own house in order, when it comes to expat taxation.
Making a list, checking it twice
Current pandemic permitting, are you planning a move abroad this coming year? Maybe you have already made the move to far-flung shores. You’ll be required to plan logistically whether you’re moving or already in situ, and that includes filing your taxes as a U.S. citizen.
So, keep abreast of updates and upcoming changes, and ensure that you have your tax bases covered in order to avoid any penalties. Moving abroad is exciting, but, before you unpack those bags, allow us to unpack some of the proposed tax changes and jargon that goes with them, that may be likely to affect you as an American overseas in 2022.
Unravel the acronyms to get to the forms
You won’t be alone in feeling slightly confused regarding all of the different acronyms and forms that go hand-in-hand with taxation. U.S. tax for expats can be a riddle, but is one that requires solving, so let’s look at the different taxations, which ones are applicable to you and your situation, and any upcoming updates and proposed tax changes together.
What’s the FEIE?
Head across to IRS form 2555 for the Foreign Earned Income Exclusion (FEIE) which has been raised this year (for 2022). With the FEIE, U.S. expats may also be able to exclude other items such as housing, meals and lodging provided by your employer for their convenience, so check those fringe benefits out too.
Last year the limit for Foreign Earned Income Exclusion was $108,700, and for 2022 has jumped slightly to $112,000, as it has done for the past few years:
- $105,900 for 2019
- $107,600 for 2020
- $108,700 for 2021
- $112,000 for 2022
The three Fs — File Foreign First
Usually, as an expat, if your host country requires you to file, then you will file those foreign taxes first. Then, once they are out of the way, file your U.S. taxes with the use of an additional form — Form 1116 — in order to be able to claim the U.S. Foreign Tax Credit (in lieu of anything you have to pay abroad, thus saving you some money.)
Use Form 8833 if you have any sort of exempted income, like pension, dividend, or income from royalties, depending on the tax treaty.
Failing to file Form 8833 and penalties
Confusing as these various forms and acronyms are, as a U.S. expat it’s important to get to know them all, the importance of filing, and filing when due.
What happens when you fail to file Form 8833? It’s a simple answer. You must. The form discloses your interest in “specified foreign financial assets”, and if you fail to do so for any tax year then the penalty is fairly harsh, currently set at $10,000.
Residing in the U.S. but have Foreign Assets?
What if you are residing in the United States but have a significant amount of foreign assets, perhaps a house abroad? What’s the threshold? If the market value of your foreign financial assets is greater than $50,000 on the last day of the year or greater than $75,000 at any time during the year, then you are required to fill Form 8938 (FATCA) which must be attached to your income tax return.
FATCA and its thresholds
- Married US residents filing as a joint couple:
Form 8938 in any year that the cumulative value exceeds $100,000, or if they have less than $100,000 on the last day of the year — but have more than $150,000 on any other day of the year.
- Married US residents filing separately:
Form 8938 in any year that the cumulative value is more than $50,000, or if they have less than $50,000 on the last day of the year — but have more than $75,000 on any other day of the year.
- Unmarried foreign residents:
Form 8938 to be filed in any year that the cumulative value on the last day of the year is more than $200,000, or if they have less than $200,000 on the last day of the year — but have more than $300,000 on any other day of the year.
- Married foreign residents filing jointly:
Form 8938 as before, in any year that the cumulative value on the last day of the year is more than $400,000, or if they have less than $400,000 on the last day of the year — but have more than $600,000 on any other day of the year.
- Married foreign residents filing separately:
Again, Form 8938, in any year that the aggregate maximum value on the last day of the year is more than $200,000, or if they have less than $200,000 on the last day of the year — but have more than $300,000 on any other day of the year, according to the IRS.
Is the FATCA the same as FBAR?
No. They have similarities but are not the same. FATCA Form 8938 is new and is more encompassing, and was first introduced on the 2011 1040 tax return — it’s not the same as the FBAR which has been around a long time, since 1970. Up to date penalties for failing to file the 8938? Around $10,000 and maxing out at around the $60,000 mark.
As an American abroad, should you have interest in overseas financial accounts then you must file the aforementioned FBAR, but only if the aggregate value of those accounts exceeds $10,000 at any time during the year.
FBAR threshold and penalty for failing to file
A United States citizen, green card holder or a resident alien that has any financial interest in financial accounts on foreign shores should file an FBAR (Form 114). FinCEN requires you to provide this information as part of your tax reporting obligations as a U.S. expat if the cumulative, total value of the foreign financial accounts is more than $10,000 during the calendar year
The current penalty? The lowest level is the same amount as the threshold — $10,000, or, 50% of the balance of the account at the time of the violation but it could be even worse as a jailable term may also apply.
Note that you don’t file the FBAR with your federal tax return as it has to be filed electronically with the Financial Crimes Enforcement Network’s e-filing system. The FBAR must be received by the Department of the Treasury on or before April 15th of the year immediately following the calendar year being reported. FinCEN will allow those who file and fail to meet the FBAR annual due date of April 15th an extension (applied automatically) to October 15th annually.